I spoke a number of months ago to an audience composed largely of machining companies. (Machining companies transform metal and other hard materials into parts used in transportation equipment, packaging machinery and other manufactured goods.) Like many CEOs in mature manufacturing markets, the leaders felt their companies’ offerings had become commoditized. Quality and service, once differentiators, were now requirements to even be considered. Once considered, a customer’s (usually a purchasing agent) final selection of a part supplier was driven largely by prices quoted on bids.
Many leaders were angry and frustrated at the Herculean power price (and purchasing agents) acquired during the recession. All signs point to price remaining important into the distant future as well. If companies are doing their best work ever, why were they being treated like a commodity versus a truly valued partner and supplier?
A comparison of websites reveals the answer.
To win an INC 500 spot, innovate your business model
In looking at the websites of the companies whose leaders I would meet with, I noted a very typical pattern – a company describing itself from an inside perspective:
• Years in business
• Types of parts
• Types of equipment
• Quality systems
• Value-added services
In essence, each company had the same business model: manufacturing component parts designed by an OEM to the OEM’s specifications. (OEM=original equipment manufacturer) Once qualified on quality, reliability and capacity, price drives which machining company offers the most value. Why? Because the process of qualifying suppliers ensures that each company can provide the desired benefits. When perceived benefits are the same, price differences between suppliers are value differences as well.
A commodity market requires only two qualified suppliers
The companies were different in terms of the part sizes and tolerances they could best manufacture, a reflection of how the industry had fragmented along lines defined largely by types of machine tools in use. But other than two companies dealing with exotic materials and one meeting an incredibly tight tolerance level, it was clear there’d likely be at least two competitors for any size/tolerance need. And this was just Illinois! Two suppliers meeting requirements is all that a buyer needs to position one supplier against another in order to extract the lowest possible price.
One website was different. Fusion Systems, Inc., an Illinois machining company has a uniquely different business model. In lieu of making parts, Fusion manufactures and distributes its customers’ older products, products that themselves have a lot of machined parts. Fusion promises to increase profitability on its customers’ legacy products while increasing customers’ time to work on new products, products that are more strategic to a company’s success.
Like any great business model, Fusion’s model is built on a strategic insight – there’s untapped profit opportunity in legacy products, but companies are too busy doing more work with fewer staff or too constrained by established parts protocols to realize the profit opportunity contained in redesigning older product lines. And oftentimes, it’s the legacy products that create a lot of complexity in a manufacturing or distribution site (e.g., repair parts are ordered erratically).
On Fusion’s homepage President Craig Zoberis describes today’s manufacturing challenge, effectively communicating that Fusion is here to help relieve the load on manufacturing and engineering leaders and their staffs and improve its customers’ bottom line in the process. This graph visually explains the FUSION financial benefit.
A strategic insight plus the courage to build a different business earns the young company a spot on the INC 500. Fusion is one of only 13 companies on the 2009 list making components used in final manufacturing goods.
Unlike other machining companies, Fusion sets prices to earn its desired return, using an open-book pricing model with its customers. Open-book is a good signal to send potential customers if your aim is replace their manufacturing operations in making their legacy parts. Fusion negotiates to reach a profitable price, while competitors compete on (oftentimes unprofitable) price, because Fusion competes as a one-of-a-kind business, versus a me-too business.
Feeling uncomfortable? Find the strategic insight that will enable you to innovate your business model. The Inc 500 is within reach if you reach for it.
For insight on business model strategy, read my recently released book, Beyond Price.